Can any of the company-specific risk be diversified away by investing in both Elme Communities and Diamondrock Hospitality at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Elme Communities and Diamondrock Hospitality into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Elme Communities and Diamondrock Hospitality, you can compare the effects of market volatilities on Elme Communities and Diamondrock Hospitality and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Elme Communities with a short position of Diamondrock Hospitality. Check out your portfolio center. Please also check ongoing floating volatility patterns of Elme Communities and Diamondrock Hospitality.
Diversification Opportunities for Elme Communities and Diamondrock Hospitality
The 3 months correlation between Elme and Diamondrock is -0.82. Overlapping area represents the amount of risk that can be diversified away by holding Elme Communities and Diamondrock Hospitality in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Diamondrock Hospitality and Elme Communities is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Elme Communities are associated (or correlated) with Diamondrock Hospitality. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Diamondrock Hospitality has no effect on the direction of Elme Communities i.e., Elme Communities and Diamondrock Hospitality go up and down completely randomly.
Pair Corralation between Elme Communities and Diamondrock Hospitality
Given the investment horizon of 90 days Elme Communities is expected to generate 1.32 times more return on investment than Diamondrock Hospitality. However, Elme Communities is 1.32 times more volatile than Diamondrock Hospitality. It trades about 0.06 of its potential returns per unit of risk. Diamondrock Hospitality is currently generating about -0.17 per unit of risk. If you would invest 1,523 in Elme Communities on March 6, 2024 and sell it today you would earn a total of 27.50 from holding Elme Communities or generate 1.81% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in Elme Communities are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak primary indicators, Elme Communities exhibited solid returns over the last few months and may actually be approaching a breakup point.
Over the last 90 days Diamondrock Hospitality has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak performance, the Stock's basic indicators remain strong and the recent confusion on Wall Street may also be a sign of long-lasting gains for the firm traders.